if you’re buying or selling a property and time is tight, putting an indemnity policy in place can offer a sensible solution to a swift sale. Discover what an indemnity policy is, why you might need one and how it could benefit you in your property transaction. We answer the most frequently-asked questions on the subject to give you a simple guide to this type of insurance.
FAQs
What is an indemnity policy?
An indemnity policy is a type of insurance that protects a property’s owner from any costs that might come up related to certain types of defects or more obscure legal issues. The policy allows you to complete the sale when another legal solution might take too long, or is otherwise impossible.
The seller and buyer basically agree that it’s not in their interests to investigate the problem(s) before the sale. Common examples of this kind of situation include issues around planning permission or certification for key fixtures and structural works.
How does an indemnity work?
An indemnity insurance policy will cover you against a third party making a claim against you. Specifically, because of a defect on the property you want to buy. There are different types of indemnity policy, covering a wide range of specific defects and issues. Importantly, the policy doesn’t cover the cost of fixing the issue. It just covers the cost of claims made against you because of it.
For example, let’s say that you want to buy a house, but the seller can’t provide the building regulation certificate. You don’t want to spend a lot of time and money trying to solve this regulatory problem. To avoid this, your conveyancing solicitor* might suggest that you take out an indemnity policy. They may advise this to cover you against any claim that might be made in the future because you don’t have that certificate.
If such a claim was then made (by your local authority, for example) the policy would cover you against any legal costs. However, it would not cover the cost of getting the right building certificate. Neither would it cover any subsequent work needing to be done on the property.
*If you aren’t familiar with conveyancing, check out our guide for all the information you need. It shows you how it works, how much it costs and more.
Why do I need indemnity insurance?
You may need to take out indemnity insurance if your conveyancing solicitor discovers a defect or legal issue with the property that has no quick or easy solution. It’s also possible that a mortgage provider may insist on you having an indemnity policy before they agree to lend.
While indemnity insurance usually covers against things that are very unlikely to happen, such an outcome is typically very expensive. Recertifying properties or solving legal issues about their status can involve specialists and processes costing thousands of pounds. By contrast, a standard indemnity policy costs significantly less.
What does an indemnity policy cover?
Different indemnity policies cover specific types of issues, from boilers and windows to land access rights. Typically you are covered against being fined or taken to court for incorrect/absent certification regarding your property. Each policy will have a clear description of exactly what it covers and to what monetary limit.
It’s worth mentioning again that an indemnity policy won’t cover the costs of fixing the original issue. For example, if you have indemnity insurance for a boiler, the policy won’t be any help if you need to repair or replace it.
The HomeOwners Alliance has a useful rundown of the basic types of indemnity policy and common reasons for buying them.
Who pays for an indemnity policy?
Deciding who pays for an indemnity policy is a matter for negotiation between the buyer and seller. It’s an interesting question, because the policy is technically beneficial to both sides, since it speeds up the sale. However, the buyer benefits the most in the long term because they are protected against future problems.
This means that usually the buyer will pay for the policy. The seller generally only pays if the problem in question is because they’ve made a mistake. Losing or damaging key paperwork might be such a reason, for example. Accordingly, in many instances, the buyer and seller may agree to simply split the costs.
How much is an indemnity policy?
The costs of an indemnity policy vary according to the type and level of cover they provide. They can be as little as £20 and as much as £800. Within this wide price range, most standard policies tend to cost around £150-£250.
Importantly, buying an indemnity policy is a one-off charge – you don’t have to pay monthly or yearly premiums.
Is an indemnity policy transferable?
Buying an indemnity policy ties it to the property, and it transfers from owner to owner after each sale. The only issue is if the property changes its usage type – say, from residential to commercial – which may invalidate the policy. Also, if the property increases significantly in value, you may have to pay another one-off charge to raise the level of cover.
Who do I speak to about indemnity insurance?
You can always research options yourself online, but it’s best to consult a conveyancing solicitor before buying an indemnity policy. The nature of this kind of insurance is often highly technical, so a conversation with an expert can save you from buying a policy you don’t really need, or missing out on cover that you do need!
Do I need an indemnity policy to sell my house?
While it’s not essential to have an indemnity policy to sell your house, if you’re looking for a quick sale that avoids any nasty surprise costs, it might be worth paying for. The cost of an indemnity policy is often split between the buyer and the seller. However, as a buyer motivated to sell quickly, you may benefit from taking out an indemnity policy yourself, to avoid the extra time spent negotiating the purchase with the buyer.
What is the difference between insurance and indemnity?
The difference between insurance and indemnity is that an insurance policy is a contract where the insurer guarantees responsibility to pay for any successful claim, an indemnity is a legal clause that transfers the responsibility for relevant losses to a certain party. It’s an important distinction, because claims are, ultimately, all about who is responsible and who needs to pay up.
Weighed in the balance: Is indemnity insurance worth it?
From a purely financial standpoint, indemnity insurance is very unlikely to ever be used, making it less worthwhile. However, if you can secure a policy for a reasonable price, you will be protecting yourself against really expensive future surprises, however unlikely they may be.
The more immediate benefit of taking out indemnity insurance is that it will help conclude the sale of the property. This makes indemnity insurance a relatively cheap way of solving thorny legal issues that might otherwise hamper negotiations prevent the sale entirely.
Insurance is just one of the considerations attached to buying a property. If you’re looking to make the big move and want to see how average moving costs add up, check out this comprehensive guide.
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